Renegotiate 401(k) expenses annually, but beware fee traps

The catalysts: Competition remains tight among plan providers; scrutiny from federal regulators is rising; and the improving stock market is driving up plan assets, giving you more negotiating clout.

First, you must understand 401(k) fees:

Investment management fees account for most 401(k) expenses. What's typical? Plans with fewer than 500 people that carry an average balance of $14,000 pay an expense ratio of 1.50 percent to 2.0 percent of plan assets in investment fees, according to publishers of the 401(k) Provider Directory. Some employers pay the fee while others have it deducted from plan assets.

Administrative fees cover services such as statements and education materials. But read carefully; some fees are hidden.

Shopping around: 5 key questions. Here are five key questions to ask when negotiating or shopping for a new provider:

1. Which fees are deducted from 401(k) assets and which do you pay separately?

2. Which services do basic fees cover and which incur extra charges, such as loans, employer matching contributions and automatic enrollment?

3. Does the provider handle its own recordkeeping or use another company? Check the quality of the work. Ask for sample reports.

4. Will we incur a charge for ending our agreement early?

5. What are the fees for each investment option? Example: Small capitalization funds have higher expenses than large-cap funds.

For more on 401(k) fees, go to www.dol.gov/ebsa/publications/401k_employee.html or www.401khelpcenter.com.